Glen Thomas is president of GT Power Group, president of the PJM Power Providers Group, which represents independent power producers, and former chairman of the Pennsylvania Public Utility Commission.
Every PJM capacity auction tells a story. PJM’s capacity auctions are intentionally designed to provide a glimpse into the future and allow market participants to anticipate tomorrow’s challenges so market-based solutions can be crafted today.
Between May of 2018 and June of 2024, capacity markets were clearing at prices that told the market that supply was robust, demand was basically flat, new resources were largely not needed and some older, lesser efficient resources could retire. With these assumptions, lower prices for consumers make sense.
Of course, we know that is not the reality of today as demand expansion and supply contraction are creating a significant tightening of available generation resources everywhere, including in PJM’s wholesale markets. The July 2024 capacity auction for the 2025/26 delivery was the first auction in over a half decade that sent a message to suppliers that we need you to stay, and we need you to bring some more friends.
Higher prices make for challenging discussions, but they should not be a signal for panic. There will be hot takes a plenty, interest-group-motivated spin and comparisons to other situations that are completely irrelevant. Fingers will be pointed in every direction as people look to blame others for price increases. Policymakers would be wise to be a calming influence and not add fuel to any of these unnecessary fires.
For policymakers, the key takeaway is that the PJM market is catching up to most of the rest of the country in feeling the pressure to manage the supply crunch. PJM, however, will distinguish itself from others by managing itself through this pinch with market-based solutions and not knee-jerk, over-reactionary regulatory or legislative mandates that have proven more costly and less effective. As the PJM Independent Market Monitor recently advised, “PJM and its market participants will need to continue to resist the temptation to turn to regulatory solutions based on cost of service rather than markets.”
While the road ahead could be a bumpy ride as demand increases, supply shrinks and upward pressure on price is persistent, here are five relatively straight-forward actions that PJM policymakers can and should do to ensure that consumers continue to experience the reliability and market efficiency benefits that have been traditionally enjoyed in the PJM region:
- Keep the faith. Competitive markets and their efficiencies have saved consumers billions of dollars. Pressure to abandon the market by pursuing out of market solutions will likely come as opportunistic companies put their bottom lines over the health of an efficient market. Policymakers need to end those discussions quickly. Now, more than ever, during this period of transitioning supply and load, stable, competitive markets are essential to delivering reliability at reasonable costs to the 65 million customers in PJM who depend on these markets to keep the lights on at home and power their businesses. Markets work best when they are not interfered with — let’s not go down that road.
- Stop the bleeding. The cheapest and easiest way to maintain reliability is to keep existing assets on the system. Assets that are capable of still running should not be forced off the system by arbitrary state or federal policies. Moreover, generation owners can take action to keep assets in service — for instance, through coal-to-gas switching — when capacity prices support those actions. Illinois, with the stroke of the pen, could keep (rather than force the shutdown of) 6,000 very needed megawatts on the system — and it should do so. Other state and federal policies also are hastening the premature retirement of viable assets. Economics should determine plant closures — not regulatory or legislative fiat.
- Get a grip on demand. PJM is facing demand growth like it has never seen. There are a lot of incredible numbers being carelessly tossed around that are being used by some to advance self-serving policy solutions. This needs to stop. There is little doubt that demand is going up. There is a lot of doubt about the scale and pace of that growth. Consumers and regulators deserve an honest assessment about how much of the growth is real and how much it is going to cost them.
- Be real about reliability. PJM has noted that 38,000 MW of new capacity have signed interconnection agreements and higher capacity prices can be an important enabler to bring these resources to energy production. However, the vast majority of that 38,000 MW is renewable and not all resources are created equally when it comes to reliability. Wind and solar make for great energy resources when the wind is blowing and the sun is shining, however, despite the name of the TV show, it is not always sunny in Philadelphia. FERC and PJM should prioritize projects in the queue that will have greater impacts on the reliability equation. State policymakers should be pushing them to do so.
- Be engaged. Interstate wholesale markets can be complicated, and it is very easy for incomplete understandings to lead to policies that raise prices and decrease reliability. Policymakers need to better understand wholesale markets. PJM always welcomes policymaker visitors — go see them and understand and appreciate what is being managed in PJM. Most importantly, do not pursue policies in the energy space without a complete and thorough understanding of what impact those policies will have on reliability, emissions and price in the wholesale power market.
There can be little doubt that things are changing quite quickly in PJM. The grid is facing unprecedented challenges on both the supply and demand side. Now is exactly the right time for thoughtful conversations that lead to policies rooted in the competitive market structure that have served the PJM region so well. Now is not the time to panic and pursue policies that will further undermine the markets and compound some of the problems that have brought us to the current situation.
Thoughtful leadership is not always easy, but at the end of the day, affordable and available electricity should take precedence over responding to complex problems with hasty solutions. Markets have proven their value and will continue to do so, provided the market is properly designed and well-functioning — and that is a goal to which all policymakers should aspire.
